G20/OECD Corporate Governance Principles get a refresh
During the G20 Summit in Delhi last month, the G20 leaders endorsed the revision of the G20/OECD Corporate Governance Principles. First issued in 1999, these principles together with the UK’s Cadbury Committee report from 1992, and the Sarbanes-Oxley Act of 2002- a US law, have shaped the governance landscape.
The six enunciated in this revision are (i) Ensuring the basis for an effective corporate governance framework; (ii) The rights and equitable treatment of shareholders and key ownership functions; (iii) Institutional investors, stock markets, and other intermediaries; (iv) Disclosure and transparency; (v). The responsibilities of the board; (vi). Sustainability and resilience. Each of the principles goes on to list a series of supporting principles and sub-principles.
A reading of these principles will show how Indian regulations compare well with the best-in-class globally. Nonetheless, the revisions are a pointer to the tweaks and progressive changes that we should come to expect in our markets.
Gautam Singhania recently put out a statement announcing his decision to divorce Nawaz, his wife of 32 years. Given the “unsubstantiated rumor mongering and gossip” that preceded this announcement, he requested that this personal decision be respected, allowing the family the privacy needed to sort through the various issues. We will do so.
His announcement, however, is an opportunity to raise questions regarding how ‘private’ the lives of listed company CEOs ought to be. Afterall, health issues, divorce, protracted battles with siblings, moral turpitude, regulatory misdemeanours etc. can all distract the CEO and impinge on a company’s performance.
Voting Data and Outcomes for the NIFTY 500 Companies for 2022
1 June 2023: IiAS today published its annual compilation of ‘Voting Data and Outcomes for the NIFTY 500 Companies’ for 2022.
For the year under review, promoters held 50.45% in NIFTY500, institutional investors owned 28. 42% percent, with others holding the balance 21.14%.
The promoters voted 85.22% of their shares, much lower than 92.67% of the shares voted during 2021. While it is expected that promoters will vote all their shares, it is not so: there are resolutions in which promoters as interested or related parties do not get to vote. Of the votes cast by promoters, 99.85% were in favour of the resolutions proposed, while 0.15% were against.
Institutional investors polled 83.57% of the shares they own, marginally more than the 82.26% voted the previous year. Of the votes cast by institutional investors, 93.68% were in favour of the proposed resolutions, while 6.31% were against.
The ‘others’ an amalgam of various types of investors, hold not just the lowest percentage of equity but polled 29.01% their shares, which while higher than the 26.31% voted the previous year, remains very low. As with promoters and institutional investors, 99.12% (99.09%) of their votes were in favour of the proposed resolutions, while 0.88% (0.91%) were against.
In aggregate, of the shares held, 72.87% were voted on in 2022, implying promoters accounted for 59.0% of the total shares voted, institutions 32.6% and others just 8.4%. Aggregating the votes cast 97.8% of the votes are FOR and just 2.2% AGAINST.
The data shows that the likelihood for ordinary resolutions being approved is extremely high. And though special resolutions and those requiring majority of minority votes give the minority investors an edge, the default outcome remains that such resolutions will get approved. Consequently, of the 4991 resolutions put to vote, 24 were defeated, with a majority being approved.
In contrast, institutional shareholder dissent across resolutions is increasing, reflecting their changed approach: where previously the focus was on financial numbers, many now focus on compensation, capital allocation and transparency.
Way forward
IiAS’ analysis points to the need for regulators to re-examine recategorizing some resolutions from ordinary to special.
With regard to disclosures, , India is ahead of other countries. It is the only geography that requires institutional investors to disclose their voting rationale. We can further build on this by mandating that the voting rationale be made mandatory for a few more categories of investors including corporates, trusts and private equity.
The voting disclosure itself needs to be more granular. Currently all institutions are clubbed; disclosures across a various sub-category – mutual funds, insurance companies, pension funds, alternate investment funds and foreign institutional investors, corporate bodies, and retail.
Finally, there is a need to step up the periodicity of the voting disclosure by funds. These are currently quarterly and can be within a week of the vote being cast. A faster dissemination will provide a quicker feedback-loop between companies and investors and increase the engagement between the participants.
THE YEAR IN NUMBERS
The NIFTY 500 companies:
Held 994 shareholder meetings during the year.
This included 503 annual general meetings (AGMs), 40 extraordinary general meetings (EGMs), 417 votes through postal ballot (PBs), and 34 meetings convened under the aegis of the national company law tribunal (NCMs).
Proposed 4997 resolutions. Six resolutions were withdrawn or otherwise not put to shareholders to vote, putting the final count at 4991.
24 of these resolutions were defeated and 4967 were approved.
Five resolution categories accounted for about 70.74% of the resolutions. These are director appointment 1627 or 32.5% of the resolutions, adoption of accounts (604, 12.1%) remuneration and compensation (597, 11.9%), dividend distribution (391, 7.8%) and auditor appointment (316, 6.3%).
Voting by institutional investors
Median votes cast were 82.11% (82.68%)
Percentage of shares voted was 83.57% (82.26%)
Voted 93.68% (94.38%) of their shares FOR and 6.31% (5.62%) AGAINST
Voted their entire holding on 0.8% (0.5%) of the resolutions.
Did not vote a single share on 0.7% (0.7%) of the resolutions.
Voted their entire shareholding i.e. 100% FOR on 36.5% (40.3%) of the resolutions.
Investor dissent:
14.5% (13.3%) of the resolutions saw ≥25% institutional shares voted AGAINST.
5.3% (5.0%) of the resolutions saw 50% institutional shares voted AGAINST.
1.4% (1.7%) of the resolutions saw 75% institutional shares voted AGAINST.
0.1% (nil) of the resolutions saw 100% institutional shares voted AGAINST.
The recent circular from the Security and Exchange Board of India’s (SEBI) streamlining and enhancing disclosures of material events is aimed at adding ‘more’ transparency and improving the timelines of corporate disclosures. Furthermore, the disclosure requirements have been extended to include shareholder agreements including family settlements “to the extent that (these) impacts management and control of the listed entity.” This notification also expects that with effect from 1 October 2023, India’s top 100 listed entities will confirm, deny, or clarify market rumours on the stock exchanges.
Till case law is established, the new regulations will be a major point of friction between companies and regulators and aggravate intra promoter rivalries. Till then the best test for boards to apply is whether the disclosure of any event or development will make the company more attractive or less attractive to investors or leave its value unchanged.
07 September 2023: On 05 September 2023, Institutional Investor Advisory Services (IiAS) released the third edition of its study on board composition and structure of the NIFTY500 companies at Vahura OnBoard’s roundtable ‘The Great Board Refresh 2024’.
Our study assesses companies on their readiness to meet the 2024 regulation thresholds – in 2024, boards will be required to refresh their slate of Independent Directors. On 31 March 2023, the NIFTY 500 had 4,724 board seats, of which 2,441 seats were filled by Independent Directors – and of these, 375 board seats were filled by Independent Directors with a tenure of 10 years or more (tenured Independent Directors). The grandfathering of previous tenures of Independent Directors comes to an end in 2024 and these tenured Independent Directors will have to cease their positions.
Corporate India has already begun a steady refreshment of boards and board independence has increased over the past three years. Of the NIFTY 500, 198 companies had at least one tenured Independent Director on their board on 31 March 2023, down from 253 on 31 March 2021. IiAS considers those with a tenure of 10 years or more as non-independent – factoring that in, 253 of the NIFTY 500 companies have independent directors comprise 50% or more of board size on 31 March 2023, up from 174 on 31 March 2021.
In the run up to 2024, tenured independent directors will exit the board and a fresh set of appointments is likely to bring better objectivity. While several companies have had a steady path to rotating their independent directors, there are several others that are likely to have to make material changes in one fell swoop. For such companies, ensuring board stability and maintaining institutional memory will be key. In such circumstances, companies may consider continuing their tenured Independent Directors in a non-executive capacity for a year or two, to handhold the new board.
“Independent Directors are the pillars of strong governance and for safeguarding the rights of minority shareholders. Hence, there's a growing emphasis on the selection and reappointment of Independent Directors, with a keen eye on their skill sets.”, said Ms. Shweta Rao, Head, Vahura OnBoard.
As tenured Independent Directors are required to cease their positions, boards must use the vacancies to build greater diversity and board independence.
Diversity on boards has been an agenda for almost all markets; for India, the regulation has built in a simple yet narrow measure of diversity – gender. Despite the improvement in women representation on boards, at 18.2% women representation on NIFTY 500 boards, India lags behind several markets. Most of corporate India continues to focus on the number of women rather than thinking of diversity as a function of board size. Diversity brings in a balance in decision-making, and therefore, boards must consider targeting at least 30% of the composition as women.
Because a dominant proportion of Indian companies are controlled by families, independent directors will typically aggregate about 50% of all directorships. But composition in terms of statistics is not sufficient – boards must evaluate if they have the necessary skills required for the next decade. With changing environments, technology, geopolitical landscapes, and stakeholder expectations, boards will navigate a different world than before. To this extent, boards must find the right mix of the traditional skill sets (like finance, law, and human resources) and newer skill requirements (technology, sustainability).
“As regulations get more prescriptive, businesses become more complex and investors more demanding, building a board that is fit-for-purpose is going to be more challenging”, said Ms. Hetal Dalal, President and COO, IiAS.
Stakeholders’ expectations of boards have increased manifold, as have the expectations of regulators. Directors now have greater scrutiny and accountability for governance failures. The next decade will only intensify the responsibilities for board members. Therefore, ensuring stronger oversight on the management and building strong governance structures must be focus for boards from 2024.
Three vignettes from a recent book by S Raman who retired as whole-time member of SEBI. The first focuses on the business case for good governance, the second discusses a few corporate battles from his time at SEBI and the third underlines the central message contained in the Kotak Committee report.
S.Raman is a career banker. He began as a clerk in State Bank of India and after two years joined Bank of India as an officer where he spent 35 years, with a last posting as Chief Executive, New York. He was appointed Executive Director, Union Bank of India, in October 2008 and was Chairman & Managing Director, Canara Bank from SEP 2010 TO September 2012. After this he served as a Whole Time Member, Securities and Exchange Board of India for about five years.
Finolex Cables Limited (FCL) and Finolex Industries Limited (FIL) form part of the Finolex group. The ownership of these companies is characterized by a byzantine web of crossholdings characteristic of the pre-liberalization era.
The promoters (Chhabria family) hold 35.92% in Finolex Cables, with Orbit Electricals Private Limited (Orbit) holding a bulk (30.75%) of the equity. In addition, Finolex Industries holds 14.51% of the equity - although it is classified as a public shareholder. The promoters hold 52.47% of the shares in Finolex Industries with 32.39% being held through Finolex Cables and 18.8% held through Orbit.
Following a series of judicial developments, Deepak Chhabria has ceased to be Whole-time Director designated as “Executive Chairman” of the Company with effect from 16 October 2023. But this may well be a marker, albeit an important one, the family feud.
The battle raises some important issues, including the role of the scrutinizer, the timeline for the reappointment of executive directors and the guardrails to protect the non-family shareholders.
G20/OECD Corporate Governance Principles get a refresh
During the G20 Summit in Delhi last month, the G20 leaders endorsed the revision of the G20/OECD Corporate Governance Principles. First issued in 1999, these principles together with the UK’s Cadbury Committee report from 1992, and the Sarbanes-Oxley Act of 2002- a US law, have shaped the governance landscape.
The six enunciated in this revision are (i) Ensuring the basis for an effective corporate governance framework; (ii) The rights and equitable treatment of shareholders and key ownership functions; (iii) Institutional investors, stock markets, and other intermediaries; (iv) Disclosure and transparency; (v). The responsibilities of the board; (vi). Sustainability and resilience. Each of the principles goes on to list a series of supporting principles and sub-principles.
A reading of these principles will show how Indian regulations compare well with the best-in-class globally. Nonetheless, the revisions are a pointer to the tweaks and progressive changes that we should come to expect in our markets.
Gautam Singhania recently put out a statement announcing his decision to divorce Nawaz, his wife of 32 years. Given the “unsubstantiated rumor mongering and gossip” that preceded this announcement, he requested that this personal decision be respected, allowing the family the privacy needed to sort through the various issues. We will do so.
His announcement, however, is an opportunity to raise questions regarding how ‘private’ the lives of listed company CEOs ought to be. Afterall, health issues, divorce, protracted battles with siblings, moral turpitude, regulatory misdemeanours etc. can all distract the CEO and impinge on a company’s performance.
Voting Data and Outcomes for the NIFTY 500 Companies for 2022
1 June 2023: IiAS today published its annual compilation of ‘Voting Data and Outcomes for the NIFTY 500 Companies’ for 2022.
For the year under review, promoters held 50.45% in NIFTY500, institutional investors owned 28. 42% percent, with others holding the balance 21.14%.
The promoters voted 85.22% of their shares, much lower than 92.67% of the shares voted during 2021. While it is expected that promoters will vote all their shares, it is not so: there are resolutions in which promoters as interested or related parties do not get to vote. Of the votes cast by promoters, 99.85% were in favour of the resolutions proposed, while 0.15% were against.
Institutional investors polled 83.57% of the shares they own, marginally more than the 82.26% voted the previous year. Of the votes cast by institutional investors, 93.68% were in favour of the proposed resolutions, while 6.31% were against.
The ‘others’ an amalgam of various types of investors, hold not just the lowest percentage of equity but polled 29.01% their shares, which while higher than the 26.31% voted the previous year, remains very low. As with promoters and institutional investors, 99.12% (99.09%) of their votes were in favour of the proposed resolutions, while 0.88% (0.91%) were against.
In aggregate, of the shares held, 72.87% were voted on in 2022, implying promoters accounted for 59.0% of the total shares voted, institutions 32.6% and others just 8.4%. Aggregating the votes cast 97.8% of the votes are FOR and just 2.2% AGAINST.
The data shows that the likelihood for ordinary resolutions being approved is extremely high. And though special resolutions and those requiring majority of minority votes give the minority investors an edge, the default outcome remains that such resolutions will get approved. Consequently, of the 4991 resolutions put to vote, 24 were defeated, with a majority being approved.
In contrast, institutional shareholder dissent across resolutions is increasing, reflecting their changed approach: where previously the focus was on financial numbers, many now focus on compensation, capital allocation and transparency.
Way forward
IiAS’ analysis points to the need for regulators to re-examine recategorizing some resolutions from ordinary to special.
With regard to disclosures, , India is ahead of other countries. It is the only geography that requires institutional investors to disclose their voting rationale. We can further build on this by mandating that the voting rationale be made mandatory for a few more categories of investors including corporates, trusts and private equity.
The voting disclosure itself needs to be more granular. Currently all institutions are clubbed; disclosures across a various sub-category – mutual funds, insurance companies, pension funds, alternate investment funds and foreign institutional investors, corporate bodies, and retail.
Finally, there is a need to step up the periodicity of the voting disclosure by funds. These are currently quarterly and can be within a week of the vote being cast. A faster dissemination will provide a quicker feedback-loop between companies and investors and increase the engagement between the participants.
THE YEAR IN NUMBERS
The NIFTY 500 companies:
Held 994 shareholder meetings during the year.
This included 503 annual general meetings (AGMs), 40 extraordinary general meetings (EGMs), 417 votes through postal ballot (PBs), and 34 meetings convened under the aegis of the national company law tribunal (NCMs).
Proposed 4997 resolutions. Six resolutions were withdrawn or otherwise not put to shareholders to vote, putting the final count at 4991.
24 of these resolutions were defeated and 4967 were approved.
Five resolution categories accounted for about 70.74% of the resolutions. These are director appointment 1627 or 32.5% of the resolutions, adoption of accounts (604, 12.1%) remuneration and compensation (597, 11.9%), dividend distribution (391, 7.8%) and auditor appointment (316, 6.3%).
Voting by institutional investors
Median votes cast were 82.11% (82.68%)
Percentage of shares voted was 83.57% (82.26%)
Voted 93.68% (94.38%) of their shares FOR and 6.31% (5.62%) AGAINST
Voted their entire holding on 0.8% (0.5%) of the resolutions.
Did not vote a single share on 0.7% (0.7%) of the resolutions.
Voted their entire shareholding i.e. 100% FOR on 36.5% (40.3%) of the resolutions.
Investor dissent:
14.5% (13.3%) of the resolutions saw ≥25% institutional shares voted AGAINST.
5.3% (5.0%) of the resolutions saw 50% institutional shares voted AGAINST.
1.4% (1.7%) of the resolutions saw 75% institutional shares voted AGAINST.
0.1% (nil) of the resolutions saw 100% institutional shares voted AGAINST.
The recent circular from the Security and Exchange Board of India’s (SEBI) streamlining and enhancing disclosures of material events is aimed at adding ‘more’ transparency and improving the timelines of corporate disclosures. Furthermore, the disclosure requirements have been extended to include shareholder agreements including family settlements “to the extent that (these) impacts management and control of the listed entity.” This notification also expects that with effect from 1 October 2023, India’s top 100 listed entities will confirm, deny, or clarify market rumours on the stock exchanges.
Till case law is established, the new regulations will be a major point of friction between companies and regulators and aggravate intra promoter rivalries. Till then the best test for boards to apply is whether the disclosure of any event or development will make the company more attractive or less attractive to investors or leave its value unchanged.
07 September 2023: On 05 September 2023, Institutional Investor Advisory Services (IiAS) released the third edition of its study on board composition and structure of the NIFTY500 companies at Vahura OnBoard’s roundtable ‘The Great Board Refresh 2024’.
Our study assesses companies on their readiness to meet the 2024 regulation thresholds – in 2024, boards will be required to refresh their slate of Independent Directors. On 31 March 2023, the NIFTY 500 had 4,724 board seats, of which 2,441 seats were filled by Independent Directors – and of these, 375 board seats were filled by Independent Directors with a tenure of 10 years or more (tenured Independent Directors). The grandfathering of previous tenures of Independent Directors comes to an end in 2024 and these tenured Independent Directors will have to cease their positions.
Corporate India has already begun a steady refreshment of boards and board independence has increased over the past three years. Of the NIFTY 500, 198 companies had at least one tenured Independent Director on their board on 31 March 2023, down from 253 on 31 March 2021. IiAS considers those with a tenure of 10 years or more as non-independent – factoring that in, 253 of the NIFTY 500 companies have independent directors comprise 50% or more of board size on 31 March 2023, up from 174 on 31 March 2021.
In the run up to 2024, tenured independent directors will exit the board and a fresh set of appointments is likely to bring better objectivity. While several companies have had a steady path to rotating their independent directors, there are several others that are likely to have to make material changes in one fell swoop. For such companies, ensuring board stability and maintaining institutional memory will be key. In such circumstances, companies may consider continuing their tenured Independent Directors in a non-executive capacity for a year or two, to handhold the new board.
“Independent Directors are the pillars of strong governance and for safeguarding the rights of minority shareholders. Hence, there's a growing emphasis on the selection and reappointment of Independent Directors, with a keen eye on their skill sets.”, said Ms. Shweta Rao, Head, Vahura OnBoard.
As tenured Independent Directors are required to cease their positions, boards must use the vacancies to build greater diversity and board independence.
Diversity on boards has been an agenda for almost all markets; for India, the regulation has built in a simple yet narrow measure of diversity – gender. Despite the improvement in women representation on boards, at 18.2% women representation on NIFTY 500 boards, India lags behind several markets. Most of corporate India continues to focus on the number of women rather than thinking of diversity as a function of board size. Diversity brings in a balance in decision-making, and therefore, boards must consider targeting at least 30% of the composition as women.
Because a dominant proportion of Indian companies are controlled by families, independent directors will typically aggregate about 50% of all directorships. But composition in terms of statistics is not sufficient – boards must evaluate if they have the necessary skills required for the next decade. With changing environments, technology, geopolitical landscapes, and stakeholder expectations, boards will navigate a different world than before. To this extent, boards must find the right mix of the traditional skill sets (like finance, law, and human resources) and newer skill requirements (technology, sustainability).
“As regulations get more prescriptive, businesses become more complex and investors more demanding, building a board that is fit-for-purpose is going to be more challenging”, said Ms. Hetal Dalal, President and COO, IiAS.
Stakeholders’ expectations of boards have increased manifold, as have the expectations of regulators. Directors now have greater scrutiny and accountability for governance failures. The next decade will only intensify the responsibilities for board members. Therefore, ensuring stronger oversight on the management and building strong governance structures must be focus for boards from 2024.
Three vignettes from a recent book by S Raman who retired as whole-time member of SEBI. The first focuses on the business case for good governance, the second discusses a few corporate battles from his time at SEBI and the third underlines the central message contained in the Kotak Committee report.
S.Raman is a career banker. He began as a clerk in State Bank of India and after two years joined Bank of India as an officer where he spent 35 years, with a last posting as Chief Executive, New York. He was appointed Executive Director, Union Bank of India, in October 2008 and was Chairman & Managing Director, Canara Bank from SEP 2010 TO September 2012. After this he served as a Whole Time Member, Securities and Exchange Board of India for about five years.
Finolex Cables Limited (FCL) and Finolex Industries Limited (FIL) form part of the Finolex group. The ownership of these companies is characterized by a byzantine web of crossholdings characteristic of the pre-liberalization era.
The promoters (Chhabria family) hold 35.92% in Finolex Cables, with Orbit Electricals Private Limited (Orbit) holding a bulk (30.75%) of the equity. In addition, Finolex Industries holds 14.51% of the equity - although it is classified as a public shareholder. The promoters hold 52.47% of the shares in Finolex Industries with 32.39% being held through Finolex Cables and 18.8% held through Orbit.
Following a series of judicial developments, Deepak Chhabria has ceased to be Whole-time Director designated as “Executive Chairman” of the Company with effect from 16 October 2023. But this may well be a marker, albeit an important one, the family feud.
The battle raises some important issues, including the role of the scrutinizer, the timeline for the reappointment of executive directors and the guardrails to protect the non-family shareholders.
G20/OECD Corporate Governance Principles get a refresh
During the G20 Summit in Delhi last month, the G20 leaders endorsed the revision of the G20/OECD Corporate Governance Principles. First issued in 1999, these principles together with the UK’s Cadbury Committee report from 1992, and the Sarbanes-Oxley Act of 2002- a US law, have shaped the governance landscape.
The six enunciated in this revision are (i) Ensuring the basis for an effective corporate governance framework; (ii) The rights and equitable treatment of shareholders and key ownership functions; (iii) Institutional investors, stock markets, and other intermediaries; (iv) Disclosure and transparency; (v). The responsibilities of the board; (vi). Sustainability and resilience. Each of the principles goes on to list a series of supporting principles and sub-principles.
A reading of these principles will show how Indian regulations compare well with the best-in-class globally. Nonetheless, the revisions are a pointer to the tweaks and progressive changes that we should come to expect in our markets.
Gautam Singhania recently put out a statement announcing his decision to divorce Nawaz, his wife of 32 years. Given the “unsubstantiated rumor mongering and gossip” that preceded this announcement, he requested that this personal decision be respected, allowing the family the privacy needed to sort through the various issues. We will do so.
His announcement, however, is an opportunity to raise questions regarding how ‘private’ the lives of listed company CEOs ought to be. Afterall, health issues, divorce, protracted battles with siblings, moral turpitude, regulatory misdemeanours etc. can all distract the CEO and impinge on a company’s performance.
The recent circular from the Security and Exchange Board of India’s (SEBI) streamlining and enhancing disclosures of material events is aimed at adding ‘more’ transparency and improving the timelines of corporate disclosures. Furthermore, the disclosure requirements have been extended to include shareholder agreements including family settlements “to the extent that (these) impacts management and control of the listed entity.” This notification also expects that with effect from 1 October 2023, India’s top 100 listed entities will confirm, deny, or clarify market rumours on the stock exchanges.
Till case law is established, the new regulations will be a major point of friction between companies and regulators and aggravate intra promoter rivalries. Till then the best test for boards to apply is whether the disclosure of any event or development will make the company more attractive or less attractive to investors or leave its value unchanged.
Since inception, IiAS has been at the forefront of driving the
corporate governance agenda in the Indian capital markets. Our
independent research has helped shaped the engagement
framework between companies and their stakeholders.
Empowering Indian Corporate Governance
Institutional Investor Advisory Services India Limited (IiAS) is an
advisory firm, dedicated to providing participants in the Indian
market with independent opinions, research and data on corporate
governance issues as well as voting recommendations on shareholder
resolutions.
